Many are assuming the Bank of England will hold rates for the rest of the year. But scratch the surface and there is a case for another move before year-end, says Martin Beck
Most analysts reckon the Bank of England is done cutting rates in 2025, a consensus reinforced by the Bank’s decision today to keep monetary policy on hold. With inflation still close to twice the two per cent target, the assumption is policymakers will sit tight until well into next year.
That may prove a mistake. Scratch beneath the surface, and the case for another move before year-end is stronger than the consensus suggests.
The reasons inflation is still running hot are rooted in the past. Earlier this year, households were hit with a wave of cost increases: energy bills, sewerage charges and bus fares all increased. At the same time, the government lifted employer National Insurance, introduced VAT on private school fees and sharply raised the National Living Wage. Businesses have understandably passed some of those costs onto their customers.
But these are one-off pressures. Monetary policy is supposed to be forward-looking. The Bank itself estimates it takes 12-18 months for changes in interest rates to have their full effect. If the aim is to target where inflation is heading, not where it has been, the case for further action grows clearer. And in fairness, the Bank is not blind to this, cutting rates three times so far this year, despite inflation being significantly above target.
Looking ahead, the forces set to push inflation down are mounting. Pay growth is slowing and the labour market is loosening, easing the risk of a wage–price spiral. November’s Budget could bring significant tax rises, draining demand from households and businesses alike. The rises in administered prices and tax hikes of 2025 will fall out of the annual inflation figures as we move into 2026, pulling inflation lower.
The Bank Rate is a full percentage point above the Bank’s own estimate of “neutral” (the rate of interest which is neither stimulating nor dragging on the economy) meaning monetary policy is still working as a brake on growth.
Put together, these factors argue for inflation falling back more quickly than the consensus expects.
Dissent on the MPC
It isn’t just us and some other outside analysts who think there’s a reasonable case for cutting rates again soon. Two members of the BoE’s Monetary Policy Committee, Swati Dhingra and Alan Taylor, voted for lower rates in September, arguing that policy is too tight given the outlook. That matters: dissent on the Committee can foreshadow where policy as a whole is heading.
The international backdrop also matters. Following September’s cut in US rates, investors expect the Federal Reserve to lower rates two more times before the end of 2025. While the Bank of England doesn’t automatically follow its US counterpart, history shows that it often follows a shift in US policy. For the BoE to keep rates unchanged while the Fed moves repeatedly would be very unusual.
While the Bank of England doesn’t automatically follow its US counterpart, history shows that it often follows a shift in US policy
For households and firms, the path of interest rates isn’t just a policy debate – it directly affects living standards and balance sheets. Another cut this year would ease borrowing costs, lowering the price of mortgages and making it cheaper for companies to borrow to expand. A cut would support consumer demand, as households under pressure from higher taxes and living costs feel a little more relief. And confidence would be boosted, supporting a fragile economy and providing greater clarity on the direction of travel.
Conversely, if the Bank holds rates high for too long, households and firms face a double hit: weaker consumer spending and elevated financing costs, both of which could delay investment and hiring plans.
Waiting until next spring, as markets currently expect, risks keeping policy unnecessarily tight just as inflation is set to come down. With wage growth easing, the labour market softening and households facing fresh tax hikes, the case for a modest cut before the end of this year is compelling. It would help ensure inflation glides back towards target while reducing the risk of the economy stagnating or tipping into a downturn.
The consensus says the Bank of England is done for 2025. But don’t be surprised if it proves more willing to act – and sooner – than markets currently assume.
Martin Beck is the chief economist at WPI Strategy